Development Economics

Members of the NBER's Development Economics Program met in Cambridge on November 30-December 1. The meetin g was organized by Research Associates Esther Duflo of MIT, Joseph P. Kaboski of University of Notre Dame, Jeremy Magruder of University of California, Berkeley, Mark Rosenzweig of Yale University, Christopher Woodruff of University of Oxford and Program Director Duncan Thomas of Duke University. These researchers' papers were presented and discussed:

Weak contract enforcement may reduce the efficiency of investment in developing countries. Ryan studies how contract enforcement affects efficiency in power procurement auctions covering the largest projects in India. Ryan gathers data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to input cost shocks is widespread. Ryan uses a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that winning bidders offer power below cost due to the expected value of later renegotiation. The model is used to simulate bidding with strict contract enforcement. With no renegotiation, equilibrium bids would rise to cover cost, but mark-ups relative to total contract value fall by more than half. Production costs decline modestly, due to projects being allocated to lower-cost bidders over those who expect larger payments in renegotiation.

Loans to purchase new assets sometimes use the new assets themselves as collateral, as in car or home loans in the developed world. Other loans  especially in developing countries  instead require using existing assets as collateral. Carney, Kremer, Lin, and Rao hypothesize that the endowment effect (Kahneman et al. 1990) causes consumers to dislike placing existing assets at risk by promising them as collateral. This might drive down take-up of loans collateralized using existing assets, relative to collateralizing with new assets (which may not yet have entered the reference point). The proposed project will test this mechanism using a randomized experiment in Kenya. A secondary goal will be to test whether borrowers anticipate that new assets might themselves eventually enter the reference point, becoming subject to an endowment effect. The researchers' findings will shed light on psychological factors affecting demand for financing, and on the welfare implications of loans collateralized using new assets.

Bjorkegren develops a method to analyze the effects of competition policy in a network industry. Bjorkegren estimates the network utility of adopting a phone based on its subsequent usage, using transaction data from nearly the entire network of Rwandan mobile phone subscribers over 4.5 years, and the method of Bjorkegren (2018). Bjorkegren extends that method to simulate the equilibrium choices of consumers and network operators. The Rwandan government waited to promote competition. The study finds that adding an additional competitor earlier would have reduced prices and mostly increased incentives to invest in rural towers, increasing welfare by the equivalent of 1.4% of GDP. When the network is split with a competitor, the incumbent would have captured only a fraction of the network effects generated by investment, but this effect is dominated by an increased incentive to differentiate its coverage. Bjorkegren analyzes the effects of setting different interconnection rates, and reducing switching costs through number portability.

Paul Carrillo, George Washington University; Dave Donaldson, MIT and NBER; Dina Pomeranz, University of Zurich; and Monica Singhal, University of California, Davis and NBER

The Bigger the Better? Using Lotteries to Identify the Allocative Efficiency Effects of Firm Size

Sviatschi shows that exposing children to illegal labor markets makes them more likely to be criminals as adults. Sviatschi exploits the timing of a large anti-drug policy in Colombia that shifted cocaine production to locations in Peru that were well-suited to growing coca. In these areas, children harvest coca leaves and transport processed cocaine. Using variation across locations, years, and cohorts, combined with administrative data on the universe of individuals in prison in Peru, affected children are 30% more likely to be incarcerated for violent and drug-related crimes as adults. The biggest impacts on adult criminality are seen among children who experienced high coca prices in their early teens, the age when child labor responds the most. No effect is found for individuals that grow up working in places where the coca produced goes primarily to the legal sector, implying that it is the accumulation of human capital specific to the illegal industry that fosters criminal careers. As children involved in the illegal industry learn how to navigate outside the rule of law, they also lose trust in government institutions. However, consistent with a model of parental incentives for human capital investments in children, the rollout of a conditional cash transfer program that encourages schooling mitigates the effects of exposure to illegal industries. Finally, Sviatschi shows how the program can be targeted by taking into account the geographic distribution of coca suitability and spatial spillovers. Overall, this research takes a first step towards understanding how criminals are formed by unpacking the way in which crime-specific human capital is developed at the expense of formal human capital in "bad locations."

The textbook policy response to traffic externalities is congestion pricing. However, quantifying the welfare consequences of pricing policies requires detailed knowledge of commuter preferences and of the road technology. Kreindler studies the peak-hour traffic congestion equilibrium using rich travel behavior data and a field experiment grounded in theory. Using a newly developed smartphone app, Kreindler collected a panel data set with precise GPS coordinates for over 100,000 commuter trips in Bangalore, India. To identify the key preference parameters in my model -- the value of time spent driving and schedule flexibility -- Kreindler designed and implemented a randomized experiment with two realistic congestion charge policies. The policies penalize peak-hour departure times and driving through a small charged area, respectively. Structural estimates based on the experiment show that commuters exhibit moderate schedule flexibility and high value of time. In a separate analysis of the road technology, the study finds a moderate and linear effect of traffic volume on travel time. Kreindler combines the preference parameters and road technology using policy simulations of the equilibrium optimal congestion charge, which reveal notable travel time benefits, yet negligible welfare gains. Intuitively, the social value of the travel time saved by removing commuters from the peak-hour is not significantly larger than the costs to those commuters of traveling at different, inconvenient times.

Matteo Bobba, Toulouse School of Economics, and Luca Flabbi, University of North Carolina - Chapel Hill

Bobba and Flabbi develop a search and matching model where firms and workers are allowed to form matches (jobs) that can be formal or informal. Workers choose the level of schooling acquired before entering the labor market and whether searching for a job as unemployed or as self-employed. Firms post vacancies in each schooling market, decide the formality status of the job, and bargain with workers over wages. The resulting equilibrium size of the informal sector is an endogenous function of labor market parameters and institutions. Bobba and Flabbi focus on an increasingly important institution: a "dual" social security system where contributory benefits in the formal sector coexist with non-contributory benefits in the informal sector. They estimate preferences for the system -- together with all the other structural parameters of the labor market -- using labor force survey data from Mexico and the time-staggered entry across municipalities of a non-contributory social program. Counterfactual experiments taking into account equilibrium effects show that changing the parameters of the dual social
security system can increase output, schooling and long-term productivity at a small fiscal cost.